Registered Education Savings Plans

An RESP is a tax-sheltered way to save for a child's education. The CCRA allows parents to save a maximum of $4,000 per calendar year up to a lifetime of $42,000 on behalf of a child. Friends and relatives may also start a plan for children, and all their contributions are included in the $4,000/year limit. It has been estimated that by the year 2020, it could cost over $100,000 to send a child to four years of post-secondary education. This amount seems astronomical, especially when, as a new parent, you are more concerned with how the baby is eating and sleeping at this time, not thinking about 18 years ahead. As with any investment, the sooner it is started, the longer it has to grow. The optimal time to begin saving for children's education is when they are very small in order to maximize as many of the 18 years you have to save.

In 1998, the Federal Government announced that it would assist parents in saving for their children's education by introducing the Canada Education Savings Grant (CESG). The government will contribute 20% of the first $2,000/year contributed on behalf of a child into an RESP. For those of us who cannot maximize this opportunity every year, you can carry forward-unused CESG and access this grant money in later years. This grant from the government has made RESPs one of the most attractive ways to save for a child's education. While the money is in an RESP, the income grows tax-free. When the income is withdrawn for educational purposes, it is taxed in the student's hands, as a student, there is usually little or no tax paid on the income. The principal is returned tax free, as it does not generate a deduction for the contributor.

There has always been some concern about a child not attending post-secondary education and what happens to the income. Prior to 1997, the income was not returned to the contributor. However, there is now a feature that allows the contributor to transfer RESP income directly to his/her RRSP up to $50,000 (per contributor and providing there is contribution room available). The contributor also has the option of taking the income and paying a 20% tax in addition to regular tax.

RESP plans have been in existence for many years. One of the more popular choices is a pooled plan RESP. With these programs there is the benefit of safety, as they only invest mom and dad's money into government issued and other fixed-income investments. They have the element of pooling which means that all the contributors monies work together to grow and earn better returns than a single investor working on their own. And, as they are administered by not for profit foundations, there are enhancements added to the education assistance payments paid to the children. As well, these foundations only purpose is to assist parents in saving for their children's education

When the Grant program was announced, many financial institutions and mutual fund companies added an RESP to their available products. These RESP's are called self directed. The majority of investors in this type of plan invest in mutual funds. Mutual funds are not CDIC insured which means there is no guarantee of return of principal. They are subject to fluctuations in the market and past performance is not a guarantee for the future. These programs are not as structured as the pooled type plans, however, there are no enhancements offered, and each investor's efforts are his/hers alone. There are fees involved in both types of programs.